The effect of the APA and other U.S. transfer-pricing initiatives in Canada and other countries.

I. The Current Controversies in Transfer Pricing

A. Overview

In transfer-pricing matters, the United States can be likened to a benevolent dictator, stirring controversy by giving with one hand and taking with the other. The latter may be seen to characterize the "super royalty" provision of section 482 of the Internal Revenue Code (which was enacted in 1986)(1**) and the ensuing "White Paper" on transfer-pricing,(2) the compliance requirements of section 6038A, et seq., the recent proposed transfer-pricing regulations,(3) and the recent legislative proposals set forth in H.R. 5270.(4) The former may be seen to characterize the Advance Pricing Agreement (APA) initiative.(5)

This article examines the reaction in Canada and certain other countries to the APA initiative in the context of the other (controversial) U.S. developments just noted, particularly the section 482 regulations and H.R. 5270.

At a recent seminar conducted by the Canadian Branch of the International Fiscal Association,(6) Philip Morrison, then-International Tax Counsel to the U.S. Treasury, listened patiently to criticisms levied at the proposed section 482 regulations. It was suggested that the regulations clearly violate the norms and principles underlying the so-called arm's-length principle as generally understood and, indeed, as given its initial recognition, format, and substance by the United States itself.

Mr. Morrison responded to the criticisms by carefully explaining that, quite apart from the Administration's view that no such departure from the arm's-length principle really arises from the proposals' requirement for the use of an ex post facto bottom-line orientated approach (inherent in the comparable profit method), the regulations' writers really had no choice. In enacting the super royalty, Congress had mandated the development of pricing rules that ensure the most appropriate allocation of profit between members of a multinational and, if necessary, these rules are to be based on global profit factors rather than transactional (analysis) factors. If these rules violate the essential characteristics of, or principles underlying, arm's-length pricing, Mr. Morrison seemed to be saying, so be it.

In addition, not to be outdone by its predecessor, the current (102nd) Congress, driven by statistics that foreign multinationals are systematically stri...

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